The March 4 Deadline That Could Cost Your Trust Thousands
I had one of those “oh wow” moments this week.
You know the kind. You glance at the calendar and realize something important is closer than you thought.
Our next big deadline isn’t April 15. It’s March 4.
The 65-day rule for trusts
If you’re a trustee, the 65-day rule can matter more than you think.
Q: Derek, I’ve heard that term before. What does it mean?
A: Trusts have a special tax rule. If a trust makes a distribution within the first 65 days of the year, it can elect to treat that distribution as if it were made in the prior year.
For calendar-year trusts, that means if you want a distribution to count on your 2025 return, it must be made by March 4, 2026. Miss it by a day? It counts in 2026. There’s no grace period. No undo button.
Why does this matter?
Q: Derek, why should I care which year it shows up?
A: Because trusts are taxed brutally fast. Trust tax brackets are “compressed.” That’s the technical term. It simply means they hit the top tax bracket almost immediately. For 2025, a trust reaches the top 37% federal bracket at just over $15,000 of taxable income. Yes. Fifteen thousand.
An individual doesn’t hit that same top rate until income is well over half a million dollars. Same income. Very different tax bill. So, if income stays inside the trust, it may be taxed far more aggressively than if it’s distributed to beneficiaries.
Why not just distribute everything?
Q: Derek, if trusts are taxed that harshly, shouldn’t we just empty them out every year?
A: Not necessarily. Taxes are only one consideration. Trusts are often structured for:
- Control.
- Asset protection.
- Creditor protection.
- Protection from a beneficiary’s poor decisions.
Sometimes, leaving income inside the trust makes sense. Sometimes distributing it makes sense. The right answer depends on the trust’s purpose and the family’s goals. Tax savings alone should not drive the decision.
What makes this complicated?
Q: Okay, Derek. So let’s calculate the income and cut a check before March 4.
A: That sounds simple. It rarely is.
Most individual trustees are not doing detailed trust accounting throughout the year. That means they usually don’t know exactly how much distributable net income the trust has.
Distributable net income isn’t the same thing as cash. You can have plenty of cash and very little distributable net income. You can have little cash and a lot of distributable net income.
Income and cash are not interchangeable. That surprises people every year.
What about capital gains?
Q: Derek, if the trust had capital gains, do those count as income?
A: By default, no. The default rule says capital gains are considered corpus, meaning principal, not income. If they are principal, they are not part of distributable net income. However, some trust documents override that rule.
If you don’t know what your trust says, you’re guessing. And guessing in trust administration is rarely a good plan.
What about brokerage 1099s?
Q: Can’t we just use the 1099s from the brokerage account?
A: Here’s the problem. Most final 1099 bundles are not issued until after March 4.
So what do we use? The December 31 statements. We estimate based on year-end data.
That makes some trustees uncomfortable. They assume the numbers must be final before any decision is made. In reality, we work with the best information available at the time.
What if the trust owns a partnership?
Q: Derek, what if the trust receives a K-1?
A: Now things get even more complicated. If the trust is a partner in a partnership, you generally cannot determine final distributable net income until all K-1s are received. And K-1s often arrive well after March 4. Sometimes in late spring. Sometimes in September.
Q: Can’t we just use the cash the partnership distributed?
A: No. Partnership income is not the same as cash distributions. You can receive no cash and still owe tax. You can receive cash and have little taxable income. This is called “phantom income.” It’s very real for anyone receiving K-1s.
Why deal with this at all?
Q: Derek, with all this uncertainty, why even bother with the March 4 deadline?
A: Two reasons.
First, many trusts require income distributions under the terms of the document. If the document says income must be distributed, it must be distributed. Trustees who ignore that obligation can face legal exposure.
Second, leaving income inside a trust may result in unnecessarily high tax rates.
Even if the calculation isn’t perfect, thoughtful planning is almost always better than ignoring the issue entirely.
Why does this matter?
Q: What should trustees be doing now?
If you’re serving as trustee, you should:
- Review the trust document to confirm whether income distributions are required.
- Determine how capital gains are treated under the document.
- Review year-end brokerage statements.
- Identify whether the trust receives K-1s.
- Coordinate with your CPA before March 4.
Waiting until the first week of March is not ideal.
This is not a flashy deadline. It doesn’t get the attention of April 15. Yet it can have significant tax and legal consequences if overlooked.
If you’re unsure how the 65-day rule applies to your trust, call our office. We’ll walk through the numbers, the trust provisions, and the broader strategy
Let’s get this resolved before March 4 makes the decision for you.
Start your tax savvy journey
Whether you’re ready to get started or have questions about our firm, we’re here to help.
Call Derek: (432) 687-0243
Email Derek: hello@basinwealth.com
